Sri Lanka’s luxury condo market heading for tears?

May 20, 2017, 8:01 pm

Coomaraswamay

by Amal Jayasinghe

Sri Lanka’s Central Bank has placed the seemingly thriving real estate sector under close watch after fears that excessive credit may have financed a property bubble that could burst and undermine financial stability.

Central Bank Governor Indrajith Coomaraswamay said a study was underway on bank lending to property development ventures and check if credit meant for small and medium-sized enterprises (SME) ended up in apartment building.

Condominium prices in and Colombo have been rising rapidly with many becoming more expensive than comparable apartments in Europe, Australia, East Asia and neighbouring countries.

A recent HSBC bank study noted that the luxury condominium boom in Sri Lanka was fuelled by "businessmen and deal makers with unexplained wealth " and the supply of apartments would double in Colombo by 2018 raising serious questions of sustainability.

Governor Coomaraswamay told the Foreign Correspondents’ Association on Thursday that a low interest regime about three to four years ago encouraged money into real estate which at the time appeared to give the highest rate of return on investment.

"What has been happening is that this sector has given a much higher rate of return than anything else," he said. "When that happens. In whatever sector, usually too much money gets in and then you end up in tears."

"So the job of the Central Bank would be to try to take macro prudential measures, not to essentially stifle the sector, but to kind of slow it down to a more sustainable growth path. That is what the (monetary) board is trying to figure out."

Coomaraswamy noted a sharp increase in lending to the property sector and suspected that even loans taken by SMEs also ended up in real estate.

"it is also possible that people with businesses are taking money out of their business and putting it into real estate and then borrowing from the banks to make up for the capital.

" So it gets recorded as a loan to the SME sector, but in fact there may be leakage into the real estate sector. "

He said there were safeguards such as loan-to-value, income-to-debt-service and capital requirements in lending. A central bank study would show if those safeguards had been observed.

"There are macro prudential instruments," he said. "But we have to be very, very careful because this is an important source of growth and employment in the economy right now. So we need to be careful of essentially stabilising the situation without undermining it totally."

The governor said the Monetary Board of the Central Bank was yet to decide on a course of action.

"At the moment, the board hasn’t decided that it needs to do anything as yet. But an analysis is continuing and we are having a close watch and we are very vigilant in terms of trying to pre-empt a bubble bursting."

Several banks have already stopped financing luxury apartments while others have limited their exposure to mid and lower priced condominiums.

The HSBC study had also cautioned investors about a property bubble that burst in 2009 leaving many developers without any cash to complete their projects.

About 60 per cent of buyers of apartments were speculators trying to make a quick profit while 25 per cent were Sri Lankans living abroad. Only 15 per cent bought apartments to live in them.

There are other worries of building standards too. Thursday’s collapse of a seven-storey wedding hall raised questions about building standards with Megapolis minister Champika Ranakawaka saying many condominiums did not conform to approved building plans.

The minister said there were 1,800 illegal constructions along the coastal stretch from Bambalapitiya to Wellawatte alone and the total number of such unauthorised buildings in the city of Colombo exceeded 10,000.